Selecting a Sound Financial Lifestyle

Even without realising, you are leading a lifestyle that can be broadly bucketed into three categories. Let’s learn the character of these lifestyles and which one defines you most closely 

In a recent survey conducted by one of the world’s largest life insurance companies, some fascinating facts came out about Indians and their financial planning. Take 100 Indians and 68 of them have a proper financial plan for retirement, however, only 42 of them are confident of achieving their plan. Moreover, majority of them are dependent on the government and their employers to fund that plan. If you are one of them harbouring a dream about the government providing you with a full and prosperous retirement, it is time to wake up. There are government plans that won’t let you starve, but these plans fail to maintain the lifestyle that we are used to. The reason for such mess is due to the way we spend money that we earn. 

What is your financial lifestyle? 

According to the book, ‘The Bogleheads’ Guide To Investing”, there are primarily three common financial lifestyles lived by us. These are: 

The Borrowers: 

They live on the maxim ‘Forget about tomorrow, let us live today’. It’s a financial lifestyle literally built on a house of cards--sometimes their credit cards! They live an extravagant life, drive the newest car, wear latest fashion clothes and may be living in a big and lavish house, all on bank loan or financed by debt. They fail to build wealth; instead they are building negative wealth. They actually rob tomorrow to pay for today and are heading for financial misery. 

The Consumers: 

The same survey speaks of another important stats, which is that almost 60 per cent of the respondents are saving enough for their retirement. They are categorised under consumers. They typically spend based on their income. They buy as much stuff as their income can provide. ‘Consumers’ borrow money for their major purchases such as car and home. Although they are better than ‘borrowers’, they will continue to live a rented lifestyle and will depend on their employers and the government.

The Keepers:

These are the most financially savvy citizens. Their mindset is: “Debt is deadly and earning to spend gets you nowhere. The people who reach financial freedom focus on accumulating wealth over time.” They use part of their monthly income to secure their financial future. They too borrow money, but that is likely to be more in the form of home loan, EMI of which they can afford. They spend only after setting aside payments for their future and present requirements. The keepers know these small investments will help them build wealth over time and will always have more than they need, and if luck favours them, they may have more than they want. 

Ensure the following before you start investing 

The fact that you have reached this part of the story speaks a lot about you. It means you are concerned about your financial future. You want to live a life where you can achieve all your financial goals without much of a hassle and do not want to take too many chances when it comes to leading a life of financial freedom.

 It’s your net worth which matters, therefore, even if you are earning in six-digit figure and do not save; you are heading for a financial disaster. Hence, how much you save and invest adds up to your net worth, which matters. So, it is not how much money you make, but how much you invest that matters. For beginners, net worth is the difference between what you own and what you owe. Your cash in savings account, owned home, investments, are what you own. However, the home loan, car loan or any other debt is what you owe. You can compare your net worth with others who are of similar age and income. This will help you to know where you stand. 

 Instil the discipline of savings. It is important to inculcate the habit of savings which will lead you to investment. Many of us know the importance of saving and investing, but hardly practice it. Hence, developing the discipline of savings is of paramount importance. In the survey, while 60 per cent agree to savings, only 38 per cent say they are saving adequately. So, wanting is not same as doing. 

 Pay off high interest rate debt. Paying off your high interest rate-bearing debts is also a form of investment. 

 Build an emergency fund. The reason you need an emergency fund is because it gives your investments the best chance of long-term success. An emergency fund is typically three to six months of living expenses kept in cash or cash-equivalents that are not subject to market volatility or at risk of losing value. How big an emergency fund you need depends largely on your net worth and job stability.